The municipality does not have to apply VAT pro-rata proportion from Minister
of Finance’s ordinance

VAT base of financial leasing includes additional activities

Removal from the register of VAT taxpayers requires a form of decision

Re-invoicing of the service will not protect against cost limit

Another revolution in transfer pricing?

The Ministry of Finance has published a draft amendment to the PIT Act, the CIT Act and some other acts of July 15, 2018. The project includes a number of changes regarding transfer pricing.

According to the provisions of the proposed amendment:

transfer pricing regulations are to be included in one chapter and a number of legal definitions relating to this issue are also proposed;

the arm’s length principle will be regulated, an open catalog of methods of settlement of transfer pricing is also introduced;

the transfer pricing adjustment is to be made by the end of the deadline for filing by the taxpayer an annual tax return for the tax year in which the transactions were carried out;

simplified rules of settlements (safe harbours) will be introduced, which will be applicable to loans and low-value-added services; if the conditions described in the regulations are met, the price set by the taxpayer is to be considered as a market value;

the rules governing the obligation to prepare transfer pricing documentation will be changed – the criterion determining this obligation will be the value of the transaction.

The municipality does not have to apply VAT pro-rata proportion from Minister of Finance’s ordinance

The Supreme Administrative Court on June 26, 2018 issued a precedent judgment (reference number I FSK 219/18), in which it stated that a local government unit is not obliged to apply the VAT pro-rata proportion from the Minister of Finance’s ordinance.

The case concerned the municipality, which wanted to deduct VAT from expenses related to the activity in the field of collective water supply and collection of sewage by the proportion of the share of the annual turnover from taxed transactions (documented with VAT invoices) in total annual turnover from water and sewage services.

The director of National Revenue Information and the Voivodship Administrative Court in Gdańsk did not accept such an approach. They indicated that the municipality is obliged to apply the method of calculation of VAT pro-rata proportion from the Minister of Finance’s ordinance.

The local government unit filed a cassation appeal to the Supreme Administrative Court, which, after considering the case, approved it. The court confirmed the right to deduct VAT by use of VAT pro-rata proportion proposed by the taxpayer. The Court stressed that taxpayers, to which the method of calculation of VAT pro-rata proportion from the Minister of Finance’s ordinance is dedicated to, are not obliged to apply it, provided that they propose another appropriate method. In the opinion of the Supreme Administrative Court, the method proposed by the municipality is based on unambiguous, clear criteria and deserves to be accepted. The Court also indicated the arguments for the inadequacy of the method provided for in the Minister of Finance’s ordinance. In addition, the Court confirmed the right to adapt the method of calculation of VAT pro-rata proportion to a particular type of taxpayer’s activity.

VAT base of financial leasing includes additional activities

The VoivodshipAdministrative Court in Warsaw in its judgment of July 31, 2018 (reference number III SA/Wa 3068/17), stated that additional activities fall within the scope of VAT base of financial leasing.

The case concerned a bank, which concluded financial leasing agreements with clients. As part of the agreements, it provided additional services (e.g. vehicle registration, insurance). The bank treated the release of subject of financial leasing as a delivery of goods. In the bank’s opinion, the additional services should not fall within the scope of VAT base for the supply of goods. The bank argued that, although the additional services relate to the subject of leasing, they are not provided as part of the delivery of goods.

The Voivodship Administrative Court in Warsaw did not agree with this standpoint. It pointed out that receivables due to additional services provided are so closely related to the delivery of the leased asset that they form a part of the VAT base of the main service.

Removal from the register of VAT taxpayers requires a form of decision

The Voivodship Administrative Court in Warsaw in two judgments issued recently (from 4 July 2018, reference number III SA/Wa 3481/17 and from 13 July 2018, reference number III SA/Wa 3158/17), stated that a taxpayer can be removed from VAT register only upon a decision.

Since 2017, regulations aimed at helping the heads of tax offices to remove taxpayers from VAT register have been in force. The tax authorities considered that removal from VAT register is not connected with the obligation to inform the taxpayer about it. However, they have sent regular notices.

In the opinion of the Voivodship Administrative Court in Warsaw, lack of decision on removing a taxpayer from VAT register means that removal is ineffective.

The verdicts are not legally valid yet, therefore an assessment of the Supreme Administrative Court can be expected in the cases. If the Supreme Administrative Court accepts the view of the Voivodship Administrative Court in Warsaw, the unsuccessfully deleted taxpayers will gain a basis for demanding compensation from the tax authorities for a damage suffered (for example, loss of credibility in the eyes of their contractors as a result of the removal from the VAT register).

Re-invoicing of the service will not protect against cost limit

In the individual interpretation of July 2, 2018, reference number 0114-KDIP2-3.4010.138.2018.1.MC, the Director of the National Revenue Information stated that re-invoicing of expenses for marketing and promotion services by a company to a related party is subject torestrictions related to recognizing expenses related to intangible services as tax deductible costs (article 15e of the CIT Act).

Pursuant to the CIT Act, the above limitation does not apply to the costs of re-invoiced services.

In the facts being the subject of the case, the company re-invoiced marketing services purchased from third unrelated parties to the related entity. The applicant – the company to which the services were invoiced, wanted to confirm that in such a situation the cost limit regarding intangible services does not apply to it. In the company’s opinion, the cost limitation should not apply to both re-invoicing company and to the final buyer. The purpose of introducing the said restrictions was to counteract the transfer of profits between related entities – and in the case of re-invoicing, such a risk does not occur.

The Director of the National Revenue Information disagreed with this approach. The tax authority stated that exclusion from the cost limit applies to the entity that re-invoices services to others, but does not apply to the final buyer, who does not re-invoice any service to anybody.

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